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Aug. 30 — Noncurrent commercial and industrial (C&I) loans rose during April through June as
banks grapple with the oil sector slowdown, but the full impact of low energy prices
is likely yet to be seen, a regulator said.

The Federal Deposit Insurance Corp. (FDIC) released
figures on C&I loans 90 days or more past due as part of a report on the earnings of banks
it regulates that showed second-quarter profits increased to $43.6 billion as revenues
rose and litigation expenses were reduced at some of the largest institutions.

Strong Loan Growth

Only two banks failed in the three-month period, the FDIC numbers said. The share
of lenders that were unprofitable slipped to 4.5 percent from 5.8 percent a year earlier.
The positive report on bank profits characterized loan growth among institutions as
strong.

“Even with the economy less than robust, banks continue to see a steadily increasing
demand for loans, particularly in business lending and commercial real estate,” James
Chessen, the chief economist for the American Bankers Association, said in a statement.

Interest Rates

Historically low interest rates are encouraging borrowing, Chessen said. Those low
rates have caused some banks to reach for yield, increasing their exposure to interest-rate
risk and credit risk. Federal Reserve monetary policy is under scrutiny as industry
waits for the expected tightening.

“Banks remain sensitive to interest rate risk as it becomes increasingly likely the
Fed will resume the path toward a normalization of rates by year-end,”
Chessen said. “The industry has been prepared for this for many years, and will adapt
easily to any changes. The Fed’s rate-hike path will be slow, which will keep borrowing
costs down and lending up.”

Oil Patch Trouble

While profits and loan balances increased, banks continued building their reserves.
The FDIC said the $11.8 billion in loan loss provisions added to reserves exceeded
the $10.1 billion in net charge-offs subtracted from reserves.

C&I loans accounted for much of the increase in charge-offs. Noncurrent C&I loans
—
those 90 days or more past due or in nonaccrual status — rose for a sixth straight
quarter. But the increase wasn't as sharp as the first-quarter jump, which was driven
by strain in energy-sector C&I loans (106 BBD, 6/2/16).

“Persistent stress in the energy sector has resulted in a decline in asset quality
at banks that lend to oil and gas producers, as well as banks that serve local economies
reliant on the energy sector,” FDIC Chairman Martin Gruenberg said in a news briefing.
“We likely have not yet seen the full impact of low energy prices on the banking industry,
particularly for consumer and C&I loans in energy-producing regions of the country.”

Insurance Premiums

The agency said its fund for insuring deposits of member banks rose by $2.8 billion
during the second quarter, climbing to $77.9 billion at the end of June from
$75.1 billion at the end of March. The increase was driven largely by $2.3 billion
in assessment income. The reserve ratio of the insurance fund rose to 1.17 percent
during the quarter from 1.13 percent.

Under FDIC regulations, once the reserve ratio exceeds 1.15 percent, lower regular
assessment rates go into effect. The agency said the range of initial assessment rates
for all institutions declines to between 3 cents and 30 cents per $100 of the assessment
base, from between 5 cents and 35 cents.

The FDIC expects premiums to decline for 93 percent of institutions with less than
$10 billion in assets — that is, community banks.

“On average, regular quarterly assessments are expected to decline by about one-third
for these smaller institutions,” the FDIC said in a news release. “The improvement
in the Deposit Insurance Fund since the financial crisis reflects progress in implementing
the long-term fund management plan put into place by the FDIC in the post-crisis period,
as well as improving conditions in the banking industry.”

Banks with $10 billion or more in assets pay a surcharge to bring the reserve ratio
to the statutory minimum of 1.35 percent by Sept. 30, 2020 — a Dodd-Frank requirement (51 BBD, 3/16/16). Small banks will receive assessment credits for the portion of their assessments
that contribute to the increase to 1.35 percent.

To contact the reporter on this story: Jeff Bater in Washington at
jbater@bna.com

To contact the editor responsible for this story: Seth Stern at
sstern@bna.com

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